Mortgages
Base rate rise to 4.25% ‘spells danger for millions of mortgage holders’
The Bank of England has raised the base rate for the 11th consecutive time as it reaches 4.25%, heaping more misery to households already suffering during the cost-of-living crisis.
The Bank’s Monetary Policy Committee (MPC) voted by a 7-2 majority to raise interest rates by 0.25 percentage points from 4% to 4.25% as it tries to curb inflation which climbed to 10.4% in the year to February.
Two members preferred to maintain bank rate at 4%.
However, the latest rise means the figure stands at its highest level since the 2008 financial crisis and has risen 11 times in a row from its historic low of 0.1% in December 2021.
This latest rise is likely to feed into higher mortgage costs, which have already risen substantially over the past year, while for savers, it could mean rates rise a little further.
For those with debt and credit cards, it could also mean higher rates, making it more expensive to pay back.
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Rate rise to hit variable rate mortgage borrowers
Anyone on a variable rate mortgage (estimated 1.6 million borrowers at June 2022) can expect to see a near instant increase to monthly payments, while anyone coming off a fix in the coming months will be met with higher rates when remortgaging.
According to the Financial Conduct Authority, 5.2 million mortgages will have been exposed to changes in interest rates since July 2022 to June 2024.
The regulator also recently warned that an estimated 356,000 mortgage borrowers may face payment difficulties by the end of June 2024, with those coming off a fixed deal likely to fork out an extra £340 a month.
StepChange Debt Charity warns that the continued pressure built up by high interest rates, coupled with soaring inflation, spells danger for the millions of mortgage holders on variable rates, those whose fixed rate deals are nearing an end, and tenants who face rent rises as a result.
Calculations by TotallyMoney and Moneycomms revealed that based on the average UK property (£270,708) with 75% loan-to-value, monthly mortgage payments will increase by £26 for the two million homeowners without a fixed rate deal.
Since December 2021, when interest rates started rising, this means homeowners on variable rate mortgages are forking out an extra £456 each month.
On a £150,000 property, the equivalent calculation reveals an £18 a month rise, or £345 cumulative increase in monthly repayments.
On a higher valued property (£400,000), this would mean a £48 a month or £919 respective hike since December 2021.
According to data from Moneyfactscompare, the average Standard Variable mortgage stands at 7.12%, with the 0.25% rise adding approximately £772 onto total repayments over two years (based on a £200,000 mortgage over a 25-year term on a repayment basis).
Meanwhile, the average two-year fixed rate mortgage stands at 5.32%, five-year deals are at 5%, while 10-year mortgages are at an average 4.98%.
While rates are cheaper the longer you fix, Rio Stedford, financial planning expert at Quilter said for those looking to buy a home or refinance their mortgage, “fixing for a relatively short period is likely to be your best course of action as rates are predicted to fall”.
Stedford added: “Therefore, fixing for a long time might mean that you are stuck paying higher rates for longer than necessary.”
Effect on savings
While the base rate rise may be good news for savers who have had to put up with years of paltry savings rates, with inflation running in double-digits, it means the value of your cash is being eroded in real terms.
It’s important to have an emergency buffer of cash, usually three to six months worth of your salary, but beyond that, experts suggest investing as a way to counter the effect of inflation.
Dan Howe, head of investment trusts at Janus Henderson Investor, said: “The importance of making your money work both harder and smarter has rarely been as great. Step one is finding the best savings product for an emergency fund. But beyond that, it’s important that additional savings are properly invested in a diverse portfolio. This can deliver much welcomed inflation protection as well as help to build a more robust financial future.”
What was behind the decision to raise the base rate?
It was 50/50 whether the Bank of England would raise the base rate this week, following the banking problems over the past week and the surprise uptick in inflation.
The Committee said there have been “large and volatile moves in global financial markets” in light of the Silicon Valley Bank failure and UBS’s purchase of Credit Suisse.
Minutes of the meeting stated: “The Financial Policy Committee (FPC) judges that the UK banking system maintains robust capital and strong liquidity positions, and is well placed to continue supporting the economy in a wide range of economic scenarios, including in a period of higher interest rates. The FPC’s assessment is that the UK banking system remains resilient. The MPC will continue to monitor closely any effects on the credit conditions faced by households and businesses, and hence the impact on the macroeconomic and inflation outlook.”
Given the measures announced in last week’s Spring Budget, this is expected to increase GDP by around 0.3% over coming years, and the Energy Price Guarantee will be maintained at £2,500 until July which means household disposable income is likely to stay flat rather than fall significantly.
The higher than anticipated inflation (10.4%) is also expected to fall significantly in Q2 2023. The minutes read: “The Committee has voted to increase Bank Rate by 0.25 percentage points, to 4.25%, at this meeting. CPI inflation increased unexpectedly in the latest release, but it remains likely to fall sharply over the rest of the year. Services inflation has been broadly in line with expectations. The labour market has remained tight, and the near-term paths of GDP and employment are likely to be somewhat stronger than expected previously. Although nominal wage growth has been weaker than expected, cost and price pressures have remained elevated.”
It added that its “remit is clear” that the 2% inflation target applies at all times and monetary policy will ensure that it will return to this level in the medium term.
Related: Five options if you’re struggling with your mortgage